Welcome you to BONESUPPORT's quarter one results call. My name is Emil Billbäck. I am the CEO of BONESUPPORT, and I am joined here today also by our CFO, Björn Westberg. This morning, we will take around 20 minutes to run through our presentation before concluding with a Q&A session. I will talk through our business progress that we have made during the first quarter, before handing over to Björn, who will cover the financials in more detail. Before starting the presentation, I would like to draw your attention to the disclaimer covering the forward-looking statements that we will make today. This is on slide three of our presentation. Then I would also like to introduce myself, that this is my first earning call with BONESUPPORT.
I have 25 years of experience in the life science industry, including significant international experience, having worked 10 years in Germany and four years in the U.S. Most recently, I was a member of the management board of BSN medical, which was acquired by the Swedish company SCA for EUR 2.7 billion in 2017. I would also like to tell you why I decided to join BONESUPPORT and why I believe the company has the potential to become a leading global orthobiologics company. I was attracted to BONESUPPORT by its ability to innovate and the strong clinical evidence behind its unique CERAMENT platform. The company has commercialized three highly differentiated bone graft substitutes for the treatment of bone voids. It has also been able to create a very attractive pipeline focused on enhancing bone growth.
Since joining BONESUPPORT, I have become even more enthusiastic based on the potential of our antibiotic-eluting product, CERAMENT G and CERAMENT V, which deliver major benefits when used for the management and prophylaxis of bone infections. With these best-in-class products, I am confident that we can penetrate major orthopedic indications such as trauma and revision arthroplasty, indications which form a key part of the approximately $3 billion market that we are addressing. In addition to our technology and product, BONESUPPORT has a strong senior management team, and we are well-funded through the end of 2020. With this brief introduction, I would like to move on to the highlights from the first quarter. Reported sales declined by 4% to SEK 31.1 million . Growth, however, was flat on a constant currency basis, and the result was 15% higher than in Q4 2017.
In Europe and rest of the world, we had another strong quarter. It was actually the best ever in terms of sales, with revenues up 27% to SEK 15.2 million . The rapid growth was driven by our drug-eluting products, CERAMENT G and CERAMENT V, that saw sales increase by 38% in the quarter. In North America, reported sales of CERAMENT BVF, which is currently our only product available in this market, declined by 22% to SEK 16.9 million . This reported decline was due to our distributor, Zimmer Biomet, continuing hardware supply issues, negative currency effects, and a distorted year-on-year comparison due to Zimmer Biomet increasing their stock levels in quarter one of 2017. More encouragingly though, the in-market sales in the U.S. for quarter one increased by 7% in value terms, reflecting the very strong value proposition of CERAMENT BVF.
In addition, on its recent Q1 result call, Zimmer Biomet communicated that it expected to resume full product supply at the beginning of Q3 2018. This will obviously also have a positive impact on the sales dynamic of CERAMENT BVF in the U.S. In terms of the key operating highlights, we continue to build on our industry-leading database of positive clinical data, highlighting the clear benefits our product deliver. In March, three papers based on the successful use of CERAMENT G to treat bone infections were presented at the British Limb Reconstruction Society meeting in Southampton. These include data highlighting much better clinical outcome delivered by CERAMENT G compared to competing products. Turning to our commercial platform, we saw our first product sales to three of the top 20 trauma centers in Italy via CITIEFFE , our new distributor who came on board in November 2017.
We find this to be a very promising start in Italy. We also repaid the EUR 9.5 million loan from Qrios to reduce our financing cost. We were able to do this because of our strong financial position, which provides us with funds through 2020. Following a review of BONESUPPORT's business model, it is clear to me that we need to bring a much sharper focus to the execution of our strategy. By doing this, we can accelerate the market penetration of our product. I look forward to keeping you updated on our progress. We move to slide five of the presentation. Moving on, I would like to briefly cover bone voids and bone void management. The bone voids occur when the bone fails to heal itself properly. This can be caused by trauma, revision arthroplasty, infected diabetic foot, and bone tumors.
If not managed properly, bone voids can lead to further fractures, become infected, and eventually lead to very severe conditions. Surgery is usually the treatment for bone voids, with many patients often requiring two or more operations. Our products at BONESUPPORT allow bone voids to be managed more cost-effectively with less surgery. How common is then this problem? On the next slide, you will see that there are about 660,000 procedures per year in the U.S. and in the top five European markets where CERAMENT products could be used. The total market is growing at about 5% a year and is currently valued between $2.7 billion-$3.4 billion. The market is split between bone-derived grafts such as autografts, allografts, and demineralized bone matrix. The rest of the market is made up of synthetic bone grafts, such as our CERAMENT products.
Bone-derived grafts, although widely used, have a number of drawbacks. In the case of autograft, complications are seen in over 19% of patients, and with allograft, between 25% and 60% of patients require a second operation. Demineralized bone matrix is limited in that it does not provide any structural stability to the bone graft. Given these drawbacks, I am confident that we will continue to gain market shares in both the bone-derived and synthetic bone grafting segments. This optimism is based on the convenience, the clinical, and the economic benefits that our CERAMENT product deliver. Next slide. All of our current marketed products are based on our proprietary CERAMENT platform. This comprises 60% calcium sulfate and 40% hydroxyapatite. This unique combination means that all our products can fully remodel the patient's bone. This is a crucial point of differentiation.
More importantly, this composition is able to deliver therapeutics locally into the bone. The ability to elute therapeutics in a controlled and a sustained way allows us to develop products that have important clinical as well as economic benefits. This is clearly visible with CERAMENT G and CERAMENT V. We intend to capitalize on our technology by bringing additional products to market that are designed to enhance bone growth. We are making good progress with our pipeline and remain on track to take the first product candidates into clinical development before 2020. I would like now to discuss our quarter one activities a bit more in detail. Go to slide nine. In Europe, we have continued to invest in both our direct sales capabilities as well as our distributor network. Strengthening our commercial platform is a high priority given it will accelerate our market penetration.
During the quarter, we saw strong sales of our antibiotic eluting product for the management of bone infections as an example, chronic osteomyelitis, where we have a very strong set of clinical data. We are now starting to place more emphasis on trauma indications, which is a much larger commercial opportunity. We have already made some progress in the field in Germany, specifically, where the first case has been treated at the trauma clinic in Murnau.
This is one of the top three trauma centers in all of Europe. We are also seeing more patients being treated at the big trauma units in Heidelberg and Mannheim. The growing interest in our antibiotic-eluting products was evidenced at the Nordic expert meeting on bone infections, which were held in Copenhagen in March. This is the largest event that we have organized to date, with over 80 surgeons attending. We will turn to the U.S.
In the U.S., we have our own commercial organization which supports the sales of CERAMENT BVF via the Zimmer Biomet distribution network. In quarter one, we saw evidence that our expanded and reshaped U.S. commercial organization is starting to deliver. We had a 7% in-market sales growth with particular success in the foot and ankle segment, which is one of the fastest-growing segments within orthopedics. This increase in quarter one end-user sales is encouraging for the latter part, specifically of 2018, when Zimmer Biomet is expected to be in a position to resume full supply of its hardware products. Next slide.
During the quarter, we have continued to add to our industry-leading body of clinical data that are supporting the CERAMENT products. Most recently, we had three abstracts providing supportive data relating to the use of CERAMENT G in different bone infection situations, and they were presented at the BLRS meeting in Southampton in March. The largest study compared use of CERAMENT G in 160 patients with chronic bone infections versus the use of OsteoSet T, which is a calcium sulfate carrier containing tobramycin. This was with 137 patients also with chronic bone infection. The data presented show that CERAMENT G delivers significantly better bone healing and is associated with a lower rate of recurrent infections, wound leakage, and subsequent fracture risk.
The other abstracts presented also demonstrate low or no infection recurrence and bone unions in the vast majority of the cases, despite being either a very challenging subgroup of patients or a treatment associated with high failure rates. The timeline for the important FORTIFY study is set out on slide 12. This study is designed to provide the clinical data we need for a planned PMA submission for CERAMENT G in the U.S. in 2020. Approval of CERAMENT G would give us access to a very large commercial opportunity for this highly differentiated product. The study has now initiated at all 30 sites, and recruitment is progressing as planned. The key primary endpoints for the trial are bone union and the absence of deep infection at the fracture site.
In addition to being a regulatory study, the FORTIFY will also add to the clinical data that we have supporting the use of CERAMENT G in the trauma indications. Slide 13 shows the most important post-marketing studies that are either ongoing or planned. The CERTIFY study has already completed recruitment. This study is comparing CERAMENT BVF to autograft, which is the current standard of care for treatment of tibial plateau fractures, which is in the trauma indication. Data from this study is expected late in the second half of this year. Positive data from a randomized study like CERTIFY would allow us to expand the market for all of our CERAMENT products. The Italian Revision Arthroplasty study is evaluating CERAMENT G and V in patients undergoing hip and knee arthroplasty revisions.
The study is aiming to recruit 135 patients at six centers in Italy, and this study is looking to demonstrate improved clinical outcome and a lower infection rate in the CERAMENT G or V group when compared to a retrospective control group from the same centers. As you can imagine, a successful outcome would be important as at present, there is no standard of care to reduce bone infections in patients undergoing revision arthroplasty procedures. To become a global leading orthobiologics company, I believe we need to broaden our product offering further, and particularly in the short to medium term. We intend to do this via a combination of new formulations of CERAMENT, new presentations of CERAMENT in procedure kits, as well as CERAMENT in combination with other therapeutic agents to promote bone healing.
At present, we are evaluating a number of opportunities to build our offering, and we will update you when we are progressing these. At this point, I will hand over to Björn to provide you with a review of our quarter one financials.
Thank you, Emil. Let us turn to slide 16. Reported sales in the quarter decreased by 4% overall. However, on a constant currency basis, were flat versus Q1 2017, and 50% higher than Q4 2017. This outcome was the result of lower sales in North America, which Emil mentioned earlier, being offset by the strong performance in Europe and the rest of the world, where we had our best-ever quarter, with sales increasing 27% to SEK 15.2 million. I will provide more information on these regional developments in the following segment slide. On slide 17, North America. Reported sales decreased by 22% in the quarter, impacted by the internal supply issues which Zimmer Biomet continues to face, negative currency effects on a difficult year-on-year comparison as Zimmer Biomet increased its stock levels of BVF in Q1 2017.
As Emil mentioned, Zimmer Biomet said on its recent Q1 call that it expects supply to be back on track at the beginning of Q3 2018. We are encouraged by the 7% increase in the end-user sales in Q1. We expect the rate of sales growth of CERAMENT BVF in the U.S. to improve once Zimmer Biomet resolves its supply-side challenges. The negative contribution for the first quarter was a result of the decline in sales, lower gross margin due to product mix, as well as higher sales and marketing costs and increased R&D spending. The increase in R&D was due to the FORTIFY study. Slide 18, Europe and the rest of the world. Sales in Europe and the rest of the world increased by 27% in the quarter, driven by increased acceptance and usage of our antibiotic-eluting products, which saw a 30% increase in revenues.
The continuing strong growth of CERAMENT G and CERAMENT V in Europe show that our sales efforts, in combination with the strong clinical data, are paying off. In our direct markets, our sales increased by 24%, while sales via distributor markets increased at a faster pace due to new distributors coming on stream in France and Italy in the latter part of 2017. One factor which contributed to the slower growth in our direct markets was the lower number of procedures that took place in the U.K. due to that 50,000 elective surgeries were canceled in January due to much higher level of winter flu than normal. The negative contribution was due to a reduction in gross margin, which resulted from the write-off of certain raw materials and our increased investments in sales and marketing. Slide 19, operational result development.
Overall, we got a SEK 3.9 million increase in operating loss in the first quarter versus the corresponding period last year. This was due to both the decline in reported sales and the situation in North America and the lower gross margin. Gross margin is in part impacted by raw material write-offs. Sales and marketing expenses in Q1 increased by SEK 2.8 million. We invested in the sales force and in our marketing activities, especially in events where we can interact with key opinion leaders, our key target audience. These seminars have been attended by a great number of leading orthopedic surgeons, all of which have generated very positive feedback. R&D expenses increased by SEK 5.4 million in the quarter, mainly driven by the FORTIFY study, with patient recruitment is on track. Administration expenses are much lower despite the severance cost for the company's previous CEO.
This is because of lower IPO preparation costs this year and much lower employee costs. That is due to less investing in 2018 than 2017, as previously communicated, and also less social costs as they are impacted by developments in the company's share price. Slide 20, KPIs. The key things on this slide are reported sales declined, but they are flat in constant currency terms. Positively, sales grew by 27% in Europe and the rest of the world, making a record quarter, and market sales in the U.S. increased by 7% despite Zimmer Biomet's hardware supply issues. Secondly, the gross margin was lower than planned due to three components. The product mix in the U.S., where lower-margin small packs had a higher relative share. Overall, relatively lower sales in the U.S. as the average U.S. product has higher margin than in Europe. Write-off of raw material.
Thirdly, a much-improved cash position versus a year ago. This will allow us to invest in the areas of the business we need to drive sales and value till the end of 2020. At this point, I would like to hand you back to Emil.
Thank you, Björn. I would like to conclude then by saying I have been very encouraged with what I have seen joining BONESUPPORT. I also believe that we have seen some positive development in quarter one that will allow us to get back on a strong sales trajectory as 2018 progresses. The company has a clear strategy based on innovative pipeline and strong R&D, the best clinical evidence and health and outcome-related data, effective commercial platform. However, I believe that we need to bring sharper execution to the strategy to accelerate our market penetration. This is critical to delivering the major commercial opportunity for our antibiotic-eluting products. With our current funding, we have the financial resources to deliver our strategy and to realize the potential of our highly differentiated products, generating significant shareholder value. This concludes our presentation, and I would like to open the call for the Q&A session.
Thank you. Ladies and gentlemen, if you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name has been announced, you can ask your question. If you find it is answered before it is your turn to speak, you can dial zero two to cancel. Once again, that is zero one to ask a question or zero two if you need to cancel. Our first question comes from the line of Franc Gregori of Trinity Delta. Please go ahead, your line is open.
Thank you very much. Firstly, can I just compliment you on a very informative and clear financial statement and a very comprehensive presentation. It really is impressive. The key question, I guess, is the obvious one. What is happening in the U.S.? You have given some detail, but for instance, can you give a little bit more color as to, for example, is there going to be a stocking in, or does Zimmer Biomet have enough stock in place that they need to use up? Their in-market sales may start to grow again, but when will that actually come through to you? Emil, you have now been in place for a few months, I guess.
You have mentioned that you have seen some things that you want to change. Can you, without preempting your review, what type of things are you looking for? For instance, you are going to expand in terms of products, but will you also look to partner in with other suppliers? Will you look to bring in additional products which are not exactly in your range now?
Yeah. Thank you very much, Franc. There are two questions here. One regards to the U.S., and where you are asking what we can anticipate for the near term future, and the other is regarding the strategic review that we have started. When it comes to the U.S., of course, we are dependent on Zimmer Biomet sorting out the quality and supply chain problems that they have had. We can only rely on the same statement that you have been reached by, from the CEO, Hanson, that by quarter three, they expect to be fully up and running on the supply chain situation. What we can say, though, is what you have seen in this quarter compared to previous reports is that we have shared in-market sales.
This is something that we have requested from Zimmer Biomet to be able to track how the products are performing by the end users. We did see in the beginning of last year, a certain inventory build by Zimmer Biomet, which they did in the midst of the most challenging situation with the supply. During the autumn of 2017, there was an inventory reduction, which when we look at our sales to Zimmer Biomet and what is sold in the end market, these are now starting to balance out very well.
We are discussing. We are working very closely also with Zimmer Biomet to find solutions, and we are specifically targeting hospitals that have been struck by the challenging supply situation, and we are mitigating it step by step. As I also mentioned in my presentation, we do have expectations on stronger performance going forward in 2018, which will naturally be taking place by Zimmer Biomet resolving their issues.
Franc, as to my strategic review, I am working very closely together with the management team at BONESUPPORT, and I think it is all our belief that we can be sharper and more decisive in how we execute our strategy. I think our strategy is quite well-articulated, but we can probably also be even clearer how we communicate this to the market and what steps we will take going forward. That work is not done yet. It has just started. I can share that with you that in terms of adding complementary products to support CERAMENT, we are looking at all different avenues, and we are evaluating working with strategic partners, as well as acquiring product lines that are complementary to our current value offering. When we look at the other part of the strategic review, meaning executing the strategy, we have certain markets where we have direct presence.
Those are in the main focus of this strategic review to see how do we effectively deploy our sales resources to reach out to all the trauma centers and all the centers treating osteomyelitis, where we have seen that our drug-eluting product, CERAMENT G and CERAMENT V, has a very high appreciation and strong penetration. Excuse me.
Thank you. Our next question comes from the line of Sten Gustafsson from ABG. Please go ahead. Your line is open.
Yes, good morning. Sten Gustafsson from ABG. Just a clarification there on, you talked about sharpening the execution of your strategy. Was that the adding more products and perhaps finding new partners, or could you give some other examples of what exactly you mean with sharpen the execution? Secondly, the OpEx run rate. If I take out the non-recurring item here of SEK 5.5 million, is the SEK 53.5 million, is it good level for the coming quarters, or should we expect it to come up significantly? If you can give us some guidance on the OpEx, that would be very helpful. Thank you.
Very good. Thank you, Sten. I will take the first question regarding sharpened execution, and Björn will respond to the second. When we look, Sten, at the sales success and the very strong positive recognition we have of CERAMENT G and CERAMENT V, we are looking into the direct markets, and we are concluding that in certain regions and certain departments, we have a very strong penetration of our product. We are now looking at models to see what if we would significantly increase sales resources to have a broader coverage and to be able to reach more customers. We are looking into different models to see how that would play out on our top line. Needless to say, we are very encouraged with what we have seen, but of course, it is limited by how many sales resources we have that can deliver the message to the clinic.
On the other part you asked on the product, we also recognize that the surgeons use CERAMENT in combination with a lot of other treatment agents, and we are also looking now to strategic partnerships with other companies that can give us a more complete portfolio. We do not think we need to do that, but we see that it could further accelerate our penetration. The question number two I will let you answer, Björn.
Thanks, Emil. Looking at the three different components in the operating costs, or four components in cost of sales. Of course, we have some one-time ups here in the cost of sales, and we also have, of course, when we have this higher sales of Europe compared to U.S., then we have impact on the gross margin and coming back to more normal levels in the U.S., but then we come back to more normal levels as well in gross margin.
Selling expenses, they have an increase here. I think that reflects that we are increasing the efforts in intense marketing. I think that will continue and even more as we focus in more, I think, the latter half of this year to increase headcount and so on, where in the expenses it is very much we do not have a major increase in headcount. It is very much dependent on the clinical trials we are performing. Of course, the major one there is FORTIFY. That, I would say probably this year is the highest cost for the studies, for the FORTIFY study. The cost for other studies is not that high because osteomyelitis, it is not expensive, but that is a bit more than other ones. The major component here, as mentioned, is FORTIFY.
CERTiFy is more or less completed, so we do not have any high cost for that going forward. Admin expenses, we had sort of two unusual events in this regard. One was, of course, the severance cost for the signing CEO Richard Davies. That was however balanced with the sort of other one kind of certain event regarding the social cost related to the employee share option programs. Overall, if you look in the raw cost in admin expenses, you take out these components, then we come down on a year-on-year basis as we have less vesting this year compared to the previous two years due to the employee share option programs or sort of at the end now. So I think that is the key comments for these four areas still. Thank you.
Yeah. Thanks for the clarity. Thank you.
Thank you. Once again, if there are any further questions, please dial zero one on your telephone keypads now. We have one further question joining the queue so far. That is from Lala Gregorek of Trinity Delta. Please go ahead. Your line is open.
Good morning, gentlemen. I am very impressed by your performance in Europe. To follow up on a previous question, I was curious as to the plan for the level of further investment on the sales side of things. What sort of split do you think you may have with respect to addressing the size of the sales team and your partnerships there versus generation of additional sort of marketing data? In particular, you had spoken about the seminars bearing a lot of fruit in terms of awareness and penetration. I was wondering whether you can comment a bit more on that. My second question relates to timelines. Actually, there are two parts to that. One is about the pipeline. You have a capital markets day planned for September. Will we be receiving a little bit more information about your latest thoughts there and progress? Secondly, about timelines.
You have mentioned starting the regulatory process in Australia. I was wondering if you could sort of talk through what the likely timing would be for that particular market. Thank you.
Yeah. This is Emil Billbäck. Thank you. Very insightful questions that you raised. The first one is a little, a little bit difficult to answer before we have concluded the strategic review. What I will say is, when we look at the success that we have had in certain regions, as I mentioned in my presentation, we have patients being treated and converted in some of the biggest trauma centers in Europe. We are looking at how we can have an effective sales deployment that will cover more of these very high-value customers. In that market penetration, we see training and educations and congresses as a natural part of that. Since we are very well funded to aggressively penetrate the market and execute our commercial strategy, we do not see that they stand in any kind of contrast. They go very much hand in hand.
Part of our marketing mix is to have meetings such as the one we had in Copenhagen and even accelerate that pace going forward. In terms of the capital market days, we have just started to plan actually what the content should be on that. Maybe Björn you would like to comment further on that.
Yeah. I think there are areas that we, as Emil mentioned, that we could be a bit clearer on in communicating and one component there is clarifying the overall potential. I think that could be more clear to the market because there's a very big potential in this market. Looking on the R&D portfolio, there are different components here as well. The bone enhancing portfolio, we will provide some more data about that going forward, how we want to progress that. Also as Emil mentioned, there are quite a few interesting opportunities in the mid and short-term as well, where we're looking to either develop our own products, for instance, new formulations of CERAMENT or CERAMENT in combination with other products or even, as Emil mentioned as well, to acquire products to complement our portfolio, our offering.
Also, I think we'll be more crisp on the sales execution. We started taking good steps already in the last year that we are more focused on the key accounts and we are progressing that well now. Also to increase headcounts and really to penetrate a larger share of the market. That's also very important. I think we are able to communicate that much more in September as well. Coming back to your question regarding Australia. Of course, it's always up to the regulatory authorities. We would expect, if it follows the timetable we have, an approval by the end of next year.
Wonderful. Thank you very much, gentlemen.
Thank you once again. If there are any further questions, please dial zero one on your telephone keypads now. Okay, that seems to be the final question, so I'll hand back to our speakers for the closing comments.
I would like to thank everyone for taking the time to join our presentation of the first quarter results for BONESUPPORT. As we said, we are engaging now into a strategic review. We are progressing on our portfolio, and we look forward to keeping you all updated on our progress. Thank you very much.
Thank you.